Below we look at the market volatility of prior days at a national and global scale and consider the implications going forward for smart portfolios.
Pre-Election Week— a Wobbly Start
Stocks took a big hit yesterday, continuing their sell-off of consecutive losses since Monday.
The bulls, however, are finding new excuses to be positive and are tempering the sell-off fears of recent days with faith in a swift rebound, sending futures markets up a percentage point heading into today’s trading.
We shall see.
Depending on how markets end today and tomorrow, this week could be the worst for U.S. markets since that all-too-familiar (and painful) March.
In the wake of this market volatility, the DOW gave up 3.4% in its fourth day of losses, and the S&P (which is 25% tech-heavy and dangerously over-concentrated) fared no better at -3.5%, as the NASDAQ lost 3.7%.
Big names like Facebook, Google and Twitter surrendered more than 5% each in the face of ongoing Congressional hearings.
In short: Ouch.
Market Volatility—No Surprise Here
Fortunately, our portfolios anticipate market volatility and react accordingly, rising as scared markets like these are falling.
Of course, we don’t always beat the markets, but we are never beaten down by them, as traditional portfolios always are.
Again folks—the way to succeed in the long run is by managing risk, not chasing it with a basket of over-valued stock and bonds.
Weeks like this, moreover, are healthy reminders that risk –and market volatility–is everywhere.
Other than the fact that risk assets are 1) central-bank “supported” and 2) grossly over-valued, with real bond yields in the below-zero zone and stock PE’s above 30, what else explains this most recent (yet forewarned) market volatility?
The short answer is this: Uncertainty.
The Uncertainty Beneath the Market Volatility
With COVID cases mounting, Congressional care packages on hold and a highly divisive country leaning into an emotionally high-stakes Presidential election, the tensions and fear in the air, is well, palpable.
Historically, markets rise into election night. But if this week ends as badly as it began, it would be the worst pre-election week of stock performance on record.
Markets are thus reflecting this fear and tension.
Citibank Investment Chief, David Bailin, echoed the growing concern that however the election night goes on November 3, the possibility that ballots will be contested or delayed creates a unique level of uncertainty as to who will actually be the President-elect on November 4.
Pundits are also making projections on market reactions to a Trump victory (more trade wars) or a Biden victory (extreme deficit spending), neither of which screams smooth sailing ahead.
Furthermore, given the unique 2020 polarization of left vs right today, no matter who wins on November 3, half of the population—and lots of investors—are going to be extremely agitated.
Markets will likely be no different.
Just Buy the Dip?
Thus far, every dip has been a buy, and many will likely buy this one as well.
But as Europe heads into full lockdown mode yet again, the fear of worsening economic growth, already on its knees world-wide, forces investors to consider the question of when will the dips just keep on dipping?
The lock-down issue, of course, is highly personal and highly political.
Freedom vs Safety? Freedom and safety? Opinions are premised on which ideal holds greater value to each individual, and both ideals are valuable.
The balance, as well as debate, hinges on this premise, and is, again, passionate, as are the legitimate frustrations we all share as to the best way to save lives while prioritizing liberties—both personal and economic.
Regardless of one’s views, we can all agree that more shutdowns, targeted or broad, mild or stringent, stalls domestic economic growth in a zip code near you. Hopefully, more lives will be saved, and hopefully, more portfolios will be prepared for the best measures and costs needed to do so.
Some are calling for another 20% decline in economic growth in the U.S., but as we’ve seen in the past, the disconnect between Main Street rot and Wall Street highs is no longer an aberration but an odd and expected way of life for those top-chasing investors who anticipate eternal Fed support for otherwise debt-drunk securities markets.
Stated simply, if we see another big dip, expect more QE going into a 2021 even as US investors slowly look to other markets, most notably Asia, for “value.”
Others, of course, including Bailin, are projecting that all will be fine once a COVID vaccine is effectively found, which will send otherwise beaten-down sectors like shipping, emerging markets, financials, and airlines etc. to the moon.
Where to Hide?
Until then, investors are piling into the safety of bonds, which we already know aren’t safe at all; others are running to the USD, which we already know isn’t that safe.
Alas, there’s not many places to hide when uncertainty and fear return, and traditional portfolios of bonds and stocks are certainly not safe in the long run, as we’ve argued here and here.
Nor are we alone. In fact, our once contrarian views are now getting more mainstream, as even JP Morgan is beginning to re-think traditional portfolio allocations.
JPM was in the news last week, supporting our Investment Primer 2020 theme that sky-high debt prices (record low yields) make it more difficult for 60/40 stock/bond investors to hedge against losses should equities tumble:
“The massive rally in all asset prices is destroying their potential to provide investors a return comparable to those they have gotten used to in recent decades,” said JPM strategist Stephen Dulake, “forcing adherents of the classic investing strategy of 60% stocks and 40% bonds to look further afield as they seek returns even remotely close to the near 10% annualized gains they’ve enjoyed since the 1980s.”
Without revamping portfolios, JPM predicts that US investors will barely reach 3% per year over the next decade.
We agree.
Same Problems, Different Country Codes
In Europe, things are no different nor any better, with the pan-Continental Stoxx Europe 600 falling by 3%, it’s lowest since the dark days of May.
In Spain, where we were looking at horses week, the tourism industry was noticeably tanking, as were the price of ponies and the morale of Bodega owners and folks (especially between the age of 25 and 30) who haven’t seen work for years.
Thank God for Sangria…
Countries like Italy, of course, are getting little love from increasingly risk-averse investors, which explains the embarrassing lack of interest in Italian, Greek or Spanish bonds—whose yields are rising.
And we all know what rising yields do to already debt-ravaged markets.
And we already know what the European Central Bank will do next—namely, print more euros to pay for an economy on its knees and the sovereign bonds no one will otherwise buy:
Meanwhile, Asia-Pacific shares also took a hit, with Australia (-1.6%) and Korea (-1%) seeing the heaviest drops, while China, seemingly in better COVID control, seeing it’s blue chip stocks rising.
Alas, lots of up and downs. Lots of uncertainty. Lots of market volatility.
The Same Ol’ Same Ol
But folks, what happens this week or the next is really nothing new.
The core problems that existed pre-COVID are here today and will remain tomorrow, even in a post-COVID re-birth, one which will be weighed down by the same debt cannon-ball tied to the legs of the global economy years ago, and years to come.
Debt, as we’ve argued repeatedly, is fun until it’s not.
Nations and companies can’t roll-over their debt to infinity, and no amount of growth going forward can account for the debts accumulated looking backward.
For now, however, otherwise broke companies can continue to crawl on debt, until rates rise or the rotting economies beneath their feet send consumers away and hence companies into bankruptcy.
As I’ve warned many times, eventually the markets will fall because the economy beneath their Fed-winged feet is simply gone.
In short, falling markets won’t send us into a recession, but rather a recession can send markets falling.
In the interim, the ticking time bomb of debt beneath our political and economic hope-spinners continues to tick-tock, tick tock…
Focusing on Solutions—Preparation Is Key
We are not here to time the moment this debt bomb goes off, but merely to track its second and minute hands (and yields and rates) with market data while preparing portfolios for the volatility we are seeing this week and of which we’ve warned in prior weeks.
What informed investors need is a plan, not a psychic. Our portfolio solution is designed for times like these, and the times ahead.
In the interim, please stay safe, stay informed and stay tuned. Have a fantastic weekend!
Best, Matt & Tom
